The Market Says CYA LTRO To Yesterday's Negativity
10 Year Bond 30 Year Treasury Bond CDS Convexity European Central Bank Exchange Traded Fund High Yield Italy Sovereign Debt
The market is back to being excited and bullish. Yesterday’s announcement out of Europe was underwhelming, but no one cares as a Greek PSI announcement is expected any moment. It will be interesting to finally find out how many bonds sign on at the time of the agreement and who the potential holdouts are. More importantly, once again LTRO is the talk of the town. Talk is that the demand will be €1 trillion or more (as ZeroHedge discussed here first over two weeks ago). It will be interesting to see if the number approaches that or is far smaller. We continue to believe that banks are using it to prefund redemptions and not as cheap financing to start a new round of asset gathering. All the talk about the “carry” trade makes it sound like something new that the banks have just figured out, when it is the exact trade that got them in trouble in the first place. Why did banks sell naked CDS on companies and countries (write protection)? Because they got carry with no funding worries. Listening to the “chatter” you would think the market is on fire, yet S&P is barely up in almost 2 weeks (it closed 1308 on the 18th). For the past couple of weeks, fading rallies has been working well, and we don’t see that changing as more and more people become convinced that “Europe is priced in” and ignore that strong earnings were priced in and aren’t really materializing.
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